Banks’ Equity Performance and the Term Structure of Interest Rates

Abstract

Using an extensive global sample, this paper investigates the impact of the term structure of interest rates on bank equity returns. Decomposing the yield curve to its three constituents (level, slope and curvature), the paper evaluates the time-varying sensitivity of the bank’s equity returns to these constituents by using a diagonal dynamic conditional correlation multivariate GARCH framework. Evidence reveals that the empirical proxies for the three factors explain the variations in equity returns above and beyond the market-wide effect. More specifically, shocks to the long-term (level) and short-term (slope) factors have a statistically significant impact on equity returns, while those on the medium-term (curvature) factor are less clear-cut. Bank size plays an important role in the sense that exposures are higher for SIFIs and large banks compared to medium and small banks. Moreover, banks exhibit greater sensitivities to all risk factors during the crisis and postcrisis periods compared to the pre-crisis period; though these sensitivities do not differ for market-oriented and bank-oriented financial systems.
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Foreign Ownership, Bank Information Environments, and the International Mobility of Corporate Governance

Yiwei Fang, Iftekhar Hasan, Woon Sau Leung, Qingwei Wang

Journal of International Business Studies,
forthcoming

Abstract

This paper investigates how foreign ownership shapes bank information environments. Using a sample of listed banks from 60 countries over 1997–2012, we show that foreign ownership is significantly associated with greater (lower) informativeness (synchronicity) in bank stock prices. We also find that stock returns of foreign-owned banks reflect more information about future earnings. In addition, the positive association between price informativeness and foreign ownership is stronger for foreign-owned banks in countries with stronger governance, stronger banking supervision, and lower monitoring costs. Overall, our evidence suggests that foreign ownership reduces bank opacity by exporting governance, yielding important implications for regulators and governments.
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Abstract

The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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Economy in Shock — Financial Policy is Holding Up

Abstract

According to the leading German economic research institutes, the German economy is experiencing a drastic slump as a result of the corona pandemic. In order to slow down the wave of infection, the state has severely restricted economic activity in Germany. As a result, GDP is expected to shrink by 4.2% this year. The recession is leaving clear traces on the labour market and the national budget. At its peak, the unemployment rate will soar to 5.9% and the number of short-time workers to 2.4 million. This year, the fiscal policy stabilisation measures will lead to a record deficit in the general government budget of 159 billion euro. After the shutdown, the economy will gradually recover. Accordingly, the increase in GDP next year will be strong at 5.8%. This forecast is associated with considerable downside risks, e.g. because the pandemic can be slowed faster or because the recovery of economic activity will be less successful than expected or there may be a new wave of infection.
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08.04.2020 &bullet; 5/2020

Economy in Shock – Fiscal Policy to Counteract

The coronavirus pandemic is triggering a severe recession in Germany. Economic output will shrink by 4.2% this year. This is what the leading economics research institutes expect in their spring report. For next year, they are forecasting a recovery and growth of 5.8%.

12.03.2020 &bullet; 4/2020

Global economy under the spell of the coronavirus epidemic

The epidemic is obstructing the economic recovery in Germany. Foreign demand is falling, private households forgo domestic consumption if it comes with infection risk, and investments are postponed. Assuming that the spread of the disease can be contained in short time, GDP growth in 2020 is expected to be 0.6% according to IWH spring economic forecast. Growth in East Germany is expected to be 0.9% and thus higher than in West Germany. If the number of new infections cannot be decreased in short time, we expect a recession in Germany.

Comparing Financial Transparency between For-profit and Nonprofit Suppliers of Public Goods: Evidence from Microfinance

John W. Goodell, Abhinav Goyal, Iftekhar Hasan

Journal of International Financial Markets, Institutions and Money,
2020

Abstract

Previous research finds market financing is favored over relationship financing in environments of better governance, since the transaction costs to investors of vetting asymmetric information are thereby reduced. For industries supplying public goods, for-profits rely on market financing, while nonprofits rely on relationships with donors. This suggests that for-profits will be more inclined than nonprofits to improve financial transparency. We examine the impact of for-profit versus nonprofit status on the financial transparency of firms engaged with supplying public goods. There are relatively few industries that have large number of both for-profit and nonprofit firms across countries. However, the microfinance industry provides the opportunity of a large number of both for-profit and nonprofit firms in relatively equal numbers, across a wide array of countries. Consistent with our prediction, we find that financial transparency is positively associated with a for-profit status. Results will be of broad interest both to scholars interested in the roles of transparency and transaction costs on market versus relational financing; as well as to policy makers interested in the impact of for-profit on the supply of public goods, and on the microfinance industry in particular.
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Trade, Misallocation, and Capital Market Integration

Laszlo Tetenyi

IWH-CompNet Discussion Papers,
No. 8,
2019

Abstract

I study how cross-country capital market integration affects the gains from trade in a model with financial frictions and heterogeneous, forward-looking firms. The model predicts that misallocation among exporters increases as trade barriers fall, even as misallocation decreases in the aggregate. The reason is that financially constrained productive exporters increase their production only marginally, while unproductive exporters survive for longer and increase their size. Allowing capital inflows magnifies misallocation, because unproductive firms expand even more, leading to a decline in aggregate productivity. Nevertheless, under integrated capital markets, access to cheaper capital dominates the adverse effect on productivity, leading to higher output, consumption and welfare than under closed capital markets. Applied to the period of European integration between 1992 and 2008, I find that underdeveloped sectors experiencing higher export exposure had more misallocation of capital and a higher share of unproductive firms, thus the data is consistent with the model’s predictions. A key implication of the model is that TFP is a poor proxy for consumption growth after trade liberalisation.
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Firm-level Employment, Labour Market Reforms, and Bank Distress

Moritz Stieglitz, Ralph Setzer

ECB Working Paper Series,
No. 2334,
2019

Abstract

We explore the interaction between labour market reforms and financial frictions. Our study combines a new cross-country reform database on labour market reforms with matched firm-bank data for nine euro area countries over the period 1999 to 2013. While we find that labour market reforms are overall effective in increasing employment, restricted access to bank credit can undo up to half of long-term employment gains at the firm-level. Entrepreneurs without sufficient access to credit cannot reap the full benefits of more flexible employment regulation.
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